What is homeowners insurance and how does it work?

Key points

• Homeowners insurance is a type of property insurance.
• There are eight types of home insurance policies available, depending on your coverage needs.
• A standard home insurance policy bundles six types of coverage to protect your property and liability.

What is homeowners insurance?

Homeowners insurance is defined as a contract between a homeowner and an insurance company, stating that in exchange for your premiums, the insurer will reimburse you for damages or loss caused by covered problems, up to the limits in your policy.  

Home insurance also includes coverage for additional living expenses, liability and medical payments to others. 

How does homeowners insurance work?

A standard home insurance policy works by reimbursing policyholders for covered claims. The exact way home insurance works depends on the type of claim you make.  

Here’s how home insurance works when it comes to your property: 

• You pay your home insurance bills, or premiums, according to your policy’s payment schedule. Your insurance company may give you the option of paying your premiums monthly, bi-annually or annually. 
• If your house, other structures on your property or your belongings are damaged by a covered problem, like a windstorm, you can file a claim with your insurance company. 
• If your claim is approved, you’ll be reimbursed for repairs up to your policy’s coverage limits, minus any deductible. 
• Your insurer can cover additional living expenses if your house is uninhabitable and you need to temporarily stay elsewhere. 

Here’s how home insurance works when it comes to your liability:

• Keep your policy active by paying your premiums on time. 
• If you are responsible for someone else’s injury or property damage — like if your dog bites someone at the park or your child hits a golf ball into someone’s window — you’ll file a claim with your insurance company.
• If your claim is approved, your insurance company will cover the cost of repairing the other person’s property or paying for their medical expenses, like surgery. 
• If the other party sues you over the matter, the liability portion of your home insurance policy can cover the costs of your legal defense and settlements. 

What homeowners insurance covers

There are eight types of home insurance policies, depending on your coverage needs. The most common, an HO-3 home insurance policy, provides suitable financial protection for most homeowners. It includes the following six coverages.

TYPE OF HOME INSURANCE COVERAGE	HOW THE HOME INSURANCE COVERAGE WORKS	HOME INSURANCE COVERAGE LIMITS
Dwelling	Pays to rebuild or repair the structure of your house and attached structures if they’re damaged by a covered problem	Enough to rebuild your house from the ground up after a covered disaster
Other structures	Pays to rebuild or repair detached structures on your property, like a gazebo, if any are damaged by a covered problem	Typically 10% of your dwelling coverage limit
Personal property	Pays to repair or replace your belongings if any are stolen or damaged by a covered problem	Typically 50% to 70% of your dwelling coverage limit
Loss of use	Pays for additional living expenses, like hotel stays, if you need to temporarily move out while your house is being rebuilt	Typically 10% to 30% of your dwelling coverage limit
Liability	Pays for someone else’s medical expenses and property repair fees if you’re at fault for their injuries or damaged property, like if your dog bites someone at the parkAlso covers your legal fees if you’re taken to court over it	Typically $100,000 to $500,000
Medical payments to others	Pays for a guest’s more minor medical expenses, regardless of who was at fault for the injury	Typically $1,000 to $5,000

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A standard home insurance policy insures the structure of your house and detached structures against all types of damage, except those listed as exclusions in your policy, such as flooding and earthquakes. 

When it comes to your personal property, a standard home insurance policy only pays out for claims if your belongings are damaged by one of the 16 named problems, or perils, in your policy. This includes damage due to fire, lightning, windstorms, snowstorms, home break-ins and more.

Tip: Your personal property is usually insured at its actual cash value, meaning depreciation is factored into the claim payout. Upgrade to replacement cost coverage if you want to be reimbursed at today’s prices for your belongings.

Learn more: What home insurance covers

What homeowners insurance doesn’t cover 

A standard home insurance policy will not pay to repair or rebuild your property if it is damaged by any of the below problems. 

• Acts of war.
• Corrosion caused by dry rot, rust or smog.
• Earth movement, including earthquakes, sinkholes, mudslides and mudflow, shockwaves and tremors.
• Flooding.
• Industrial smoke and pollution.
• Intentional loss.
• Mechanical breakdowns.
• Mold, rot and fungus caused by neglected upkeep.
• Negligence.
• Nuclear hazards.
• Personal pet damage to your own property.
• Pest and insect damage.
• Standard wear and tear.
• Sump pump or drainage overflow. 

Tip: You can purchase additional policies or coverage — like flood insurance, earthquake insurance or water backup coverage — to make sure you’re covered in the event of an excluded problem.

How to get homeowners insurance 

By completing a few steps, you can find a homeowners insurance policy that matches your budget and coverage needs.

Identify how much coverage you need

• Dwelling coverage. The amount of home insurance you need depends on your house’s rebuild value, meaning how much it would cost to rebuild from the ground up using similar materials in today’s market. 
• Personal property coverage. You’ll also need to decide whether the standard amount of personal property coverage adequately protects your possessions or if you want more. Conducting a home inventory can help you determine the value of your belongings. There are free home inventory apps that can help. 
• Liability coverage. When determining how much liability coverage you need, consider the total value of your assets, or how much you stand to lose in a lawsuit. If you need more liability coverage than offered by your home insurance policy, consider purchasing umbrella insurance.

Gather required information

Insurance companies ask for specific information when you request a quote. This can include:

• Age and square footage of the house.
• Building materials.
• HVAC information.
• Mortgage details.
• Number of rooms.
• Property address.
• Renovations.
• Roof condition and age.
• Year of purchase.

Pick a deductible amount

A deductible is the amount subtracted from your claim payout. If you file an approved claim for $10,000 and your deductible is $1,000, you’ll receive $9,000 from your insurance company.

The higher your deductible, the cheaper your home insurance will be, but the less you’ll receive in a claim reimbursement. 

Collect and compare quotes

It’s important to compare several home insurance quotes to ensure you’re not missing out on a better deal for the same level of coverage. 

But don’t only look at the price. You should also compare insurers’ financial ratings, claims service and customer service ratings and available discounts.

Shopping for homeowners insurance? Start here: The best home insurance companies

Is homeowners insurance required?

No federal or state law requires homeowners to insure their properties. If you plan to borrow money to pay for your home, however, your lender will almost certainly require insurance as a way to protect its investment.

Even if you purchase your home in cash or pay off your mortgage, dropping homeowners insurance is a risky move that leaves you financially exposed.

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